Volatility & the Recession. Is Volatility Here to Stay for Some Time Yet?

[JT1 10]

Hi

 

i dont know about anyone else, but i love this volatility. EURUSD is moving 40-50 pips in a matter of minutes/seconds. Today has seen a 400 pip downwards spiral.

 

EURUSD is behaving like cable used to before the volatility came about, and obviously this presents better profit potential.

 

I put this volatility down to the fact that due to the credit crunch, there are less interbank participants with less cash to splash, leading to less volume in the market, and as a result, the liquidity is thin, and price moves quickly.

 

Whereas a few months ago, before the crunch, the ranges were tighter, price movements were slower and smaller, due to the bigger volume/deeper liquidity & a greater number of interbank participants moving foreign exchange prices.

 

Assuming my theory is at least partially correct.....My question is -

 

Is this increased volatility likely to extend for some time yet, as the recession mounts & continues? Can we look forward to recent standards of volatity becoming the norm during the recession, & thus for the forseeable future?

 

Cheers.

[JT1 10]

Dam!

 

this forum is quiet!

 

[Soultrader 12]

Hi JT1,

 

Sorry I didnt notice this post till now. I share the same thoughts with you... there are fewer institutional traders due to the credit crunch. Also, banks have cut alot of their risks by diminishing position size. As a result we are seeing few lots per institutional trader causing the bid/ask to remain thinner than before. This causes price to jump easily.

 

For example Nikkei bid/ask used to be 1000 lots back in the late 80's. Since the bubble burst the bid/ask was down to around 200 - 300 lots. However, up until the credit crisis volatility was rather low compared to markets elsewhere. I think one of the elements that cause volatility is that what used to be dominated by big boys trading in lets say 100 lots... now you have the same traders trading in 20-30 lots while some are still trading in 100 lots. As a result, when the 100 lot trader comes into the market he can easily take out 4-5 levels on his own.

 

However, seeing the Nikkei stabilize since the crash (before the credit crunch) my assumption is that with enough time people adjust accordingly and volatility will go back to the norm. Im no expert in this field but since traders will reduce their position sizes accordingly to volatility.. I do think its only a matter of time before volatility settles.

[JT1 10]

Thanks ST.

 

I wonder if wer are likely to see some spot forex brokers will try widening the spreads, eg. saying that it is no longer feasible to offer a 2 pip eurusd spread, IF the current level of thin liquidity/volatility continues?

[zdo 20]

This isn't exactly FX related but since they are all so coupled up lately -

 

“The Volatility Index is at an important "Pivot Point". Yesterday, it closed on a critical 4 week support line...

time to pay close attention to what happens on the VIX. ...VIX has a correlation with the daily amount of Institutional Buying and Selling and more specifically ... the SPREAD distance between the two that occurs. So, the VIX's action will also be an indirect reflection of Institutional activity in the next two days…” Marty Chenard

 

Imo, the 'nervous breakdown' is not over, but the patient may be settling down enough to move from the crisis unit over to the regular psyche ward... don't be surprised by occasional episodic exacerbations though...

[Kiwi 16]

My own suspicion (for stock indexes) is that volatility will drop way back. STW is at getting down to half its peak price so even if nothing else happens you might suspect intraday range will scale down to half. SPI has had a nice range all year - but in 2002 it used to do 20-30 points a day. I like at least 60 pt daily ranges and would prefer 100 points.

 

So, I am collecting HSI data again (range got too large for me from August last year; but used to typically be under 200 points a day) and thinking about some 4 hourly forex pairs. A trader doesn't have to know what will happen - just how they will respond

[zdo 20]

My own suspicion (for stock indexes) is that volatility will drop way back. ... A trader doesn't have to know what will happen - just how they will respond

 

Yep - I reverted back to 'normal' platform / chart setups last Thursday at around noon for indexes... what a wonderful couple months it has been...

[DianaR 10]

It will probably be a year before we see the market settle down, and even then, we are going to see more fall out as the global depression works its way through each country.

[BlowFish 10]

I wonder if wer are likely to see some spot forex brokers will try widening the spreads, eg. saying that it is no longer feasible to offer a 2 pip eurusd spread, IF the current level of thin liquidity/volatility continues?

 

I wonder that too many times the spreads are better than the underlying market (well the bit I can get a glimpse of through IB).

 

I think they (the bookies) probably do better in these conditions all the time the punters don't widen their stops or don't widen them enough.

[Kiwi 16]

I suspect, Blowfish, that bucketshop spreads can be better than the underlying because either they're fading the bulk of their losing customers (like good bookies) or because the mix of customers somehow allows it. I guess you'd have to plot the real time difference between the bs and ib say and analyze whether they're altering it somehow.

[zdo 20]

Yes, using EJ as example

'Bucket shops' spread ~ 3+

ECN 3,4,5 even 6+

[sep34 10]

I have heard this statement many places" Institutions have cut back on their overall trading size and that the Bid/Ask is thiner then before, thus causing volatile markets".

 

Im curious...then why has the volume, e.g. on the Daily charts of Emni's, increased so much durring this extreme volatile period.

Anyone care to take a stab at this?

 

 

 

Regards..

[ItalianSharp 10]

Pappo

 

Volume never lies.

 

However, we must associate higher volume to much higher daily ranges.

 

For instance, back in 2005-6 ES average daily range used to be around 10-12 pts if I am not mistaken. A tight range means bid/ask levels are somewhat stable and there are flowing orders in both directions that pretty much even each other out, making the range a tight one.

 

In 2008, ES average daily range increased dramatically. We've seen 100pt-range days a few times this year.

 

It's normal to have big volume spikes and more participation in a wide-range day simply because the market trades at many different levels; each trading level may represent an opportunity for either buyers and/or sellers, so the more levels the more interesting it gets.

 

There were times a couple of years ago when ES couldn't cover 100pts within a single month. This year it's been able to do it in one single session!

 

This should answer one part of your question.

 

However, if volume is much higher, why are the levels thinner?

 

Simply because all that big volume is spread out over a huge range.

 

In fact, it'd be correct to compare total volume vs daily range and come up with a number like "average volume per ES pt"

 

For example, day 1 has a range of 10 ES pts with a 1M volume. Average volume per ES pt would be 100K.

 

Day 2 has a range of 100 ES pts with a 5M volume. Average volume per ES pt would be 50K.

 

Although day 2 produced amazing volume, it also produced an amazing range.

 

Hope this answers your question.

[sep34 10]

ItalianSharp,

 

In hindsight i.e. after reading your explanation, what you said makes sense to me and its simple .

 

I have learned to stay so focused on my trade plan ...Trade setups and block everything else out e.g. why we have high or low volatility. The problem with that is that your brain only thinks of supply and demand and has a hard time figuring out anything else, curse of the screen trader I guess

 

Great Explanation....Thanks

Edited December 29, 2008 by sep34

[jess82 10]

I agree saying volatility may take still more time on this market. keep in mind the economy crisis around the world and actions required to recover it. Then, we have to face unexpected performances in the market and have a plan to know what to do as traders